US Fed slashes debt purchases by another $10 bn

The US central bank will reduce bonds purchases to $65 billion per month, Ben Bernanke said Wednesday at his last meeting as Chair. No comment was directed at emerging markets, which are highly sensitive to US monetary policy.

The Federal Open Market Committee (FOMC) said it would buy $65
billion in bonds per month starting February, down from $75
billion now. The statement says the $10 billion-per-month
reduction is not necessarily a set course to be repeated at each
monthly meeting.

"Asset purchases are not on a preset course, and the
Committee's decisions about their pace will remain contingent on
the Committee's outlook for the labor market and inflation as
well as its assessment of the likely efficacy and costs of such
purchases," the statement said.

As the committee has said before, they will keep inflation rates
low until the economy is close to full employment.

There was no mention in the statement on spillover effects in
emerging markets, which have experienced great turmoil since the
US announced it would begin to taper its bond-buying.

Janet Yellen, the first female to serve as Chair of the US
central bank, will take over the post this Saturday. She is
expected to continue Bernanke’s legacy and continue to scale back
the amount of government debt the Fed buys through bonds.

At last December’s meeting, Bernanke announced America’s bond
buying program was being reduced to
$75 billion from $85 billion.

It was Bernanke’s last meeting as Chairman of the Fed, and he
will be remembered as the man who saved America from a second
Great Depression with quantitative easing, which drove interest
rates low enough to keep stocks on Wall Street afloat. The Dow
Jones Industrial Average finished up 26.5 percent in 2013, the
biggest leap in the last 16 years.

“I think he’s going to go down as one of the greatest Fed
chairmen of all time,” said Henry Paulsen, former Treasury
Secretary who worked closely with Bernanke in the high-pressure
days leading up to the government’s decision not to bailout
Lehman Brothers.

The Fed’s easy money program has been pumping billions
of dollars into the economy by simply printing money, which
propped up equities and markets after the 2008-2009 financial
crisis. Under Bernanke, interest rates reached all time lows.

A chief complaint about Bernanke, especially the massive stimulus
money, is that his policies didn’t trickle down to Main Street,
but only made the rich richer. Ex-Fed banker Andrew Huszar is one
of the most outspoken critics of quantitative easing, which he
admits saved financial markets but didn’t
help average Americans pay off their mortgages or find jobs.

Under Bernanke, monetary policy "did a wonderful job of
keeping the financial system from falling off the table,"
Jack Ablin, chief investment officer at BMO Private Bank in
Chicago told the Los Angeles Times.

"But as a side effect or consequence, it's driven a wedge
between the haves and have-nots,” said Ablin.

Emerging Markets

Since Ben Bernanke first uttered the words "taper" in May 2013,
emerging markets have gone haywire in preparing for the
instability and risks that a stronger dollar spells for them.

However, they have had time to prepare, as the US didn’t cut off
stimulus spending until December 2013. The International Monetary
Fund (IMF) released a statement Tuesday suggesting the plight of
emerging markets needs to be examined internally, as tapering
isn’t the only element offsetting global markets.

Jose Vinals, the director of the IMF’s monetary and capital
markets department, on Tuesday said the volatility in global
markets is actually caused by problems in particular developing
countries and not linked to the U.S. Federal Reserve's decision
to reduce its monetary stimulus, the International Monetary
Fund's top financial counselor said.

America’s monetary policy has been at the center of the blame
game over the huge amounts of investment that has trickled out of
emerging markets, and for the severe currency losses in Brazil,
Indonesia, Turkey, India, South Africa, and Russia.

Tapering has had a positive effect on the dollar, which has
gained against emerging economies. India’s rupee has had one of
its worst years ever, and in 2013 lost 11 percent against the
dollar. More recently, Russia’s ruble has hit a 5-year low
against the dollar, reaching 35 rubles per dollar early Wednesday
afternoon. Earlier in the weak, when the ruble hit a 5-year low against the euro, the Russian Central
Bank Chairwoman explained the ruble wasn’t weakening, but the
dollar and euro were becoming stronger:

“As a general rule, the stronger the economy, the stronger
the national currency. It’s not the ruble that weakened, but it’s
the euro and the US dollar that have appreciated against all
emerging market currencies,” bank chair Elvira Nabiullina
said Monday during an interview with Russia’s First Chanel.